GST will have to rise, warns Ken Henry

James Massola, Gareth Hutchens

One of Australia's most respected economists has lashed Treasurer Joe Hockey for his criticism of Treasury Secretary Martin Parkinson, warned Australia cannot afford new social policies without tax reform and predicted the GST will have to rise to tackle structural holes in the budget.

A day after Fairfax Media revealed former prime minister John Howard and treasurer Peter Costello both urged Mr Hockey to keep Dr Parkinson in one of the nation's top economic roles - a call ignored by Prime Minister Tony Abbott - former Treasury secretary Ken Henry lashed the now-government for its treatment of his successor in the Treasury.

In a blunt warning to Mr Hockey, who is currently preparing his first federal budget, Dr Henry said Australia simply could not afford expensive new social programs without new sources of revenue.

"We cannot afford new social policies with the current revenue base. We can't. If you look at the circumstances that the Commonwealth was in after the last big tax reform package - and I'm really talking about the implementation of the GST now in 2000-01 - at that time, the Commonwealth Budget revenue was 26 per cent of gross domestic product. That's how much the Commonwealth raised in revenue. Today, that's down at 23%," he told the ABC.

Advertisement

"If you ask me the question do we have the capacity to finance new spending without new sources of revenue, the answer is no," Dr Henry said the series of tax cuts delivered by the Howard and Rudd governments had put the budget under considerable pressure.

And he said the exit of Dr Parkinson - which is due mid-year, though speculation is mounting the current Treasury chief could now stay on until the end of the year - was unprecedented.

"It's never happened in the Treasury in 114 years, 113 years. There have only been 16 Treasury secretaries in that time, Martin was number 16. No government has ever thought it appropriate to remove the head of the Treasury and put in somebody who they think is of the right - let's say of a more comfortable political character," he said.

"I'm not saying that is what has motivated the Prime Minister on this occasion. It sounds like that though."

Dr Henry said Dr Parkinson should stay in his current position.

Dr Henry added that Mr Hockey should not have criticised Dr Parkinson's nor the Treasury, for the quality of its economic forecasting in 2013 in the lead up to the election campaign.

"A department is unable to defend itself in public obviously if it's attacked by a politician," he said.

Dr Henry also singled out the federal government's direct action scheme, which is designed to tackle man-made climate change, for criticism.

Asked about economist Ross Garnaut's recent modelling of the government's policy, which predicted the scheme would cost $4 to $5 billion - rather than the $1.5 billion predicted - Dr Henry backed Mr Garnaut's estimation and questioned the Coalition's commitment to efficacy of its plans to reduce carbon emissions.

"Ross has spent long time looking at these issues. I wouldn't question Ross on these issues," he said.

"Fundamentally the question is whether and over what time scale the Government is going to remain committed to its emissions reduction target." Mr Garnaut was instrumental in the design of the former Rudd Government's carbon pollution reduction scheme and also played a key role in designing the Gillard government's carbon tax.